June 14, 2017 / 8:02 AM / 7 months ago

ECB may face political pressure to keep policy loose: Weidmann

FRANKFURT, June 14 (Reuters) - The European Central Bank is at risk of coming under political pressure to keep its ultra-easy policy stance in place and help national budgets, which have already saved billions of euros in interest costs, Bundesbank President Jens Weidmann said on Wednesday.

With its 2.3 trillion euro ($2.6 trillion) asset purchase programme already running for more than two years, the ECB has become the single largest creditor to euro zone governments. Any hint of policy tightening poses the risk of pushing yields higher, blowing a hole in national budgets.

“At the end of the day, this can lead to political pressure being exerted on the Eurosystem to maintain the very accommodative monetary policy for longer than appropriate from a price stability standpoint,” Weidmann, who sits on the ECB’s rate setting Governing Council said.

“After all, in the context of these asset purchases, changes in monetary policy impact more directly on governments’ funding costs than interest rate moves,” he added.

Fighting stubbornly low inflation, the ECB has kept rates in negative territory for years and deployed a wide range of unconventional tools to stimulate growth and ultimately consumer prices.

Weidmann was also critical of a proposal to create a so-called European safe bond, a synthetic instrument that would pool sovereign debt into a new bond, creating a new safe asset that banks could hold to diversify their balance sheets.

“But a European Safe Bond created by an official European entity could be perceived as a stepping stone towards full-blown Eurobonds, i.e. mutual liability,” Weidmann said, who has long opposed Eurobonds.

“To avoid that perception, European Safe Bonds would have to be constructed by market participants,” he added.

The European Systemic Risk Board, headed by ECB President Mario Draghi, has been working on a proposal for such a safe bond but has already come under fire from Germany, which sees the tool as a Eurobond through the back door. ($1 = 0.8916 euros) (Reporting by Balazs Koranyi; Editing by Hugh Lawson)

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